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Stocks logged small gains Wednesday, with the Dow managing an eighth consecutive higher close, its longest such streak since 2019.
Meanwhile, the market's "fear gauge" — the CBOE Volatility Index (^VIX) — rose slightly but still closed the day with a 13 handle. Before June of this year, you'd have to travel back in time to before the pandemic to see a reading this low.
A low baseline fear level means more room for greed, which tends to result in higher stock prices as they climb the proverbial wall of worry.
But this isn't only a theory or an old wives' tale traders tell one another — history bears this out.
Going back to the inception of VIX calculations in 1990, sub-14 readings have coincided with long-term bull markets.
The chart below shows several epochs of low volatility — illustrated by the pink line — coming alongside multiyear rises in the benchmark S&P 500 (^GSPC).
The economic backdrop has also turned supportive for stocks as well. Manufacturing data remains soft but has been improving, with durable goods orders in May, for instance, beating expectations.
The service sector reflects a resilient and happy consumer, as inflation is dropping and the labor market remains strong. And economic surprises have been trending positively since the end of May.
One month ago we noted the rather large gap between consumer sentiment and the VIX, surmising either stock prices would fall or sentiment would improve.
Data out last week from the University of Michigan suggests the latter has taken place, as sentiment has "caught up" to surging stock prices.
Still, it's not that the myriad headwinds facing investors have all miraculously vanished.
In a week, markets expect the Federal Reserve to raise short-term rates by another 0.25%. Fed Chair Jay Powell will likely reiterate concerns that markets have yet to fully feel the lagged impact of 500 basis points of hikes.
And investors certainly hope this will be the Fed's final move, but some Wall Street economists aren't so sure another 25 basis points will mark the end of this rate hiking journey for the central bank.
These concerns are still reflected in the bond market, where the equivalent fear gauge — the ICE BofA MOVE Index (^MOVE) — remains quite elevated versus its ten-year range. And as ever, uncertainty and fear in the bond market can quickly spread to stocks, commodities, and currencies.
But right now, the VIX is telling stock market investors to hold on and enjoy the ride.
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